September 8, 2017
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License (BPOL) Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of ***** (the “Taxpayer”), with the Department of Taxation. You request a refund of Business, Professional and Occupational License (BPOL) taxes paid by the Taxpayer to the ***** (the “County”) for the 2011 through 2013 tax years.
The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e., the local assessment will stand unless the taxpayer proves that it is incorrect.
The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.
FACTS
The Taxpayer, a provider of laboratory testing and services, has several facilities located in the County. Specimens are collected either at doctors' offices or at Taxpayer centers and sent to a laboratory within the County. A small percentage of specimens are tested in the County, but the remaining specimens are sent to Taxpayer laboratories located outside of Virginia for testing.
The Taxpayer filed amended BPOL tax returns requesting a refund for the 2010 through 2013 tax years. The returns apportioned gross receipts according to payroll and claimed the deduction for receipts attributable to business conducted in another state (the “out-of-state deduction”). The County concurred that payroll apportionment was appropriate, but disallowed the out-of-state deduction.
The Taxpayer appealed the County's adjustments. In its final determination, the County determined that it properly denied the out-of-state deduction because the Taxpayer's employees located in the County did not participate in transactions with out-of-state customers. The Taxpayer appeals the County's final determination, contending it qualified for the out-of-state deduction because it only requires that its County employees participate in transactions with employees located outside of Virginia.
ANALYSIS
Virginia Code § 58.1-3732 B 2 provides a deduction from gross receipts otherwise taxable for any receipts “attributable to business conducted in another state or foreign country in which the taxpayer . . . is liable for an income or other tax based upon income.” Title 23 of the Virginia Administrative Code (VAC) 10-500-80 A 2 further explains that a taxpayer must be liable for an income or an income-like tax in the other state and file a return in that state to take advantage of the deduction.
The statutory language allowing the deduction is best analyzed as consisting of three requirements:
- “any receipts” includes receipts that have already been assigned to the definite place of business for BPOL taxation purposes. A business cannot deduct receipts that have already been excluded by the situsing rules.
- “attributable to business conducted in another state or foreign country” conveys that some portion of the receipts assigned to the definite place of business must be attributable to business activity in another state. To ascertain if such gross receipts exist, a business must analyze whether employees from the Virginia definite place of business earn, or participate in earning receipts attributable to customers in other states.
- “in which the taxpayer (or its shareholders, partners or members in lieu of the taxpayer) is liable for an income or other tax based upon income” denoting that a business must be liable for income tax to the state in which occurred the business activity considered in the second requirement.
When gross receipts are apportioned by using the general payroll apportionment formula, the amount of the out-of-state deduction would be determined by multiplying the total out-of-state gross receipts by the same payroll factor used to determine the situs of gross receipts. See Public Document (P.D.) 10-229 (9/29/2010). Subsequently, the Department established a three-step process for computing the out-of-state deduction when payroll apportionment is used to situs gross receipts. These steps are as follows:
- Determine if employees from the definite place of business earn, or participate in earning receipts attributable to customers in other states where a taxpayer filed an income tax return;
- Determine the receipts that are eligible for deduction; and
- Multiply the receipts eligible for the deduction by the same payroll factor used to determine the situs of gross receipts.
The Taxpayer contends the deduction is available for any gross receipts attributable to business conducted in another state or foreign country. The Department disagrees that the out-of-state deduction is available for any gross receipts attributable to business conducted in another state or foreign country. Statutory construction clearly establishes that the taxable measure of gross receipts must first be determined before any deduction is granted. In other words, receipts must first be assigned or sitused to a definite place of business. Then, from those assigned receipts to a definite place of business within a Virginia locality, a business may take a deduction under Va. Code § 58.1-3732 B 2, provided that it can identify receipts attributable to business conducted in another state in which it filed an income tax return and income tax was paid. Within this statutory construction, it is self-evident that a business cannot deduct an item from a taxable base amount if the particular item has already been excluded from such base amount in an earlier step. See P.D. 10-228 (9/29/2010).
In developing its methodology for computing the out-of-state deduction when payroll apportionment is used to situs gross receipts, the Department suggested examples of activities that may indicate whether any employees at a Virginia definite place of business participated in interstate transactions. Thus, while determining whether a taxpayer has a pool of receipts that can be deducted under Va. Code § 58.1-3732 B 2, the first step must be to ascertain whether any employees at a Virginia definite place of business participated in interstate transactions.
The reasoning behind this step was to emulate circumstances under which a Virginia business could be subject to income tax in another state. Public Law (P.L.) 86-272, codified at 15 U.S.C. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. The scope of P.L. 86-272 is limited to only those activities that constitute solicitation, are ancillary to solicitation or are de minimis in nature. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214, 112 S.Ct. 2447 (1992). Because the possible activities that could create nexus with another state far exceed activities protected under P.L. 86-272, the Department concluded that minimal contacts with an interstate transaction by personnel based at a definite place of business in a Virginia locality would be sufficient to qualify the business for an out-of-state deduction.
Thus, In P.D. 10-228, the Department found that before a Virginia definite place of business can claim the deduction there must be some evidence that employees in that definite place of business earn, or participate in earning, receipts attributable to customers in other states where the business filed an income tax return. Employee travel to such states is one obvious way to demonstrate that, but certainly is not the only evidence. The nature of the business activities conducted at a Virginia definite place of business must be analyzed to determine if any of those activities involve transactions with customers in other states. In P.D. 12-88 and other public documents, additional activities were provided, including “participating with employees in other offices in transactions,” that must also be analyzed in accordance with P.D. 10-228. Thus, contrary to the Taxpayers assertion, only gross receipts sitused to a definite place of business in a locality that imposes the BPOL tax could possibly be eligible for the out-of-state deduction under Va. Code § 58.1-3732 B 2.
In determining the situs of gross receipts, Va. Code § 58.1-3703.1 A 3 a 4 states that receipts from services are to be taxed based on (in order): (i) the definite place of business at which the service is performed, or if not performed at any definite place of business, and (ii) the definite place of business from which the service is directed or controlled. Under this general situsing rule, the gross receipts for the collection services and the testing services conducted at the collection facility would have been sitused to the definite place of business in the County while the gross receipts for testing conducted at an out-of-state laboratory would have been sitused to the out-of-state facility. Under this scenario, because the gross receipts associated with the out-of-state testing would be sitused to a definite place of business outside the locality, no gross receipts attributable to business conducted outside Virginia would be included in the gross receipts sitused to the Virginia collection facility. Thus, if gross receipts have already been attributed to a definite place of business outside of Virginia, they cannot be included in gross receipts eligible for an out-of-state deduction.
The same would be true when payroll apportionment is used in accordance with Va. Code § 58.1-3703.1 A 3 b. Both the collection and testing of specimens were part of the services performed for the Taxpayer's customers at the Virginia definite place of business. Using payroll apportionment for situsing purposes, gross receipts were divided between receipts for instate actions performed at the collection facility located in the County and receipts for out-of-state actions conducted at the laboratory located in another state. The use of payroll apportionment to assign receipts effectively eliminated from the receipts assigned to the Virginia office anything that could be attributable to activities performed by employees in offices in other states. Therefore, there are no receipts that qualify for the deduction based on activities by employees in other states.
Further, the Taxpayer's circumstances are similar to a previous determination by the Department. In P.D. 97-284 (5/25/1997), the Department found that because payroll apportionment separated the gross receipts among definite places of business, there would be no gross receipts eligible for the out-of-state deduction.
Where gross receipts attributable to the out-of-state employees have already been removed from gross receipts, the Taxpayer is limited to considering whether the activities of its Virginia employees somehow contributed to receipts in another state. Because payroll apportionment was used to source receipts, there must be actual evidence that one or more employees at the licensed definite place of business (i.e., whose wages were included in the numerator of the payroll apportionment formula) participated in transactions that generated receipts attributable to another state, and that the taxpayer filed an income tax return in that state (i.e., not de minimis or otherwise exempt from tax).
In this case, employees of the Taxpayer working at the County's definite place of business package, collect, and ship specimens to facilities located in states for testing. Because the specimens must generally be provided by customers at the collection facility in the County, it is doubtful that the Taxpayer's definite place of business located in the County would have had customers located outside of Virginia.
Thus, while participation with employees in other offices in transactions can be an attribute that qualifies a taxpayer for the deduction, it must be interpreted strictly within the context of the deduction, which is to allow a deduction for a pool of gross receipts from business accrued in a non-Virginia jurisdiction. Because the deduction is for gross receipts, a taxpayer must have actually received revenue from an out-of-state jurisdiction. Generally, that would require a customer to be located in that out-of-state jurisdiction.
DETERMINATION
Based on the evidence provided, none of the Taxpayer's employees at the County definite place of business participated in transactions with customers in other states. Further, the Taxpayer has not established the existence of any receipts assigned to its office in the County by apportionment that also qualified for the exception, even if the amount could not be quantified. Accordingly, the Taxpayer was not entitled to claim the deduction as provided by Va. Code § 58.1-3732 B 2 for the 2011 through 2013 tax years. As such, the County properly denied the Taxpayer's amended returns claiming the deduction.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/727.B